Cooperman v. Individual, Inc.
| Decision Date | 10 December 1998 |
| Docket Number | No. 98-1730,98-1730 |
| Parties | Fed. Sec. L. Rep. P 90,450 Steven G. COOPERMAN, et al., Plaintiffs, Appellants, v. INDIVIDUAL INC., et al., Defendants, Appellees. . Heard |
| Court | U.S. Court of Appeals — First Circuit |
Robert P. Sugarman, with whom David J. Bershad, Janine L. Pollack, Milberg Weiss Bershad Hynes & Lerach LLP, Glen DeValerio, Jeffrey C. Block, Matthew E. Miller and Berman, DeValerio & Pease LLP were on brief, for appellants.
Brian E. Pastuszenski, with whom Stephen D. Whetstone, Robert Noah Feldman and Testa, Hurwitz & Thibeault, LLP were on brief, for appellee Individual Inc.
Thomas J. Dougherty, with whom Matthew J. Matule, Skadden, Arps, Slate, Meagher & Flom LLP were on brief, for appellee Managing Underwriters.
Before TORRUELLA, Chief Judge, STAHL and LYNCH, Circuit Judges.
Six plaintiffs, purchasers of common stock of Individual, Inc. ("Individual" or "the Company"), brought suit under sections 11 and 15 of the Securities Act of 1933 (the "1933 Act") against Individual, its board members, and the underwriters who participated in Individual's March 1996 initial public offering ("IPO"). Plaintiffs claim that defendants made materially false and misleading statements and omitted material facts in connection with the registration statement and prospectus for the IPO. 1 The focus of plaintiffs' claim is that defendants improperly failed to disclose that, at the time the IPO became effective, a conflict existed between Yosi Amram ("Amram")--the director, founder, chief executive officer and president of Individual--and a majority of the board of directors about the strategic direction the company should take. The complaint alleges that, as a result of this conflict, Amram left Individual, causing the price of the Company's stock to fall sharply. It is claimed that failure to disclose this conflict in the registration statement and prospectus is an omission of a material fact which renders defendants liable for the damages allegedly suffered.
On April 15, 1997, defendants moved to dismiss plaintiffs' claims for failure to state a claim. In a Memorandum and Order dated May 27, 1998, the district court granted defendants' motions in their entirety. This appeal followed.
Individual is in the business of providing electronic customized information services. The Company searches tens of thousands of news sources each day and delivers to its customers personalized packages of news stories by facsimile, e-mail, the Internet, and other network systems. Individual serves enterprises as well as individual users. The Company is supported primarily by revenue from subscriptions paid by its users. Amram founded Individual in 1989 and was largely responsible for its rapid growth from a start-up to a public company. Until August 1996, Amram served as a director, president and CEO of Individual.
On January 31, 1996, Individual publicly announced that it had filed a registration statement with the Securities and Exchange Commission ("SEC") for an initial public offering of 2.5 million shares of common stock. The SEC declared the registration statement effective on March 15, 1996 and 2.5 million shares were offered to the public at a price of $14 per share.
Plaintiffs allege that at the time the registration statement became effective there was a substantial disagreement between Amram ... and a majority of the Board members ... as to the strategic direction of the Company. Amram believed that the Company should grow and expand through rapid, often costly, acquisitions of new businesses. The majority of the Board, however, believed that Individual should grow through building its core business through, among other things, the growth of its subscriber base, the expansion of its information base and providers, and enhancement of its knowledge processing systems. Prior to the Offering, a majority of the Board was greatly concerned about, and firmly opposed to, Amram's growth through acquisition strategy.
The prospectus did not disclose the existence of any disagreement between Amram and the majority of the Board. Instead, the prospectus stated that the Company's future objective was The description in the prospectus thus mirrors the complaint's description of the majority of the Board's strategy: growth through development of Individual's existing core business.
The price of Individual's stock rose rapidly in the period after the IPO due to the Company's announcements of new strategic alliances with Microsoft and Toshiba. In addition, on April 23, 1996, Individual announced its first quarter results, as well as a 233% increase in its number of users. In the aftermath of these announcements, Individual's stock price rose from $16 to $20 per share in just three days--a total increase of over twenty-two percent.
On July 24, 1996, Individual announced that Amram was taking an "indefinite leave of absence" from the Company due to a disagreement with the Board over "the pace of acquisitions." Robert Lentz, Individual's CFO, explained that Amram wanted the Company to move faster in making acquisitions and investments as the Internet's popularity exploded. Immediately after the announcement of Amram's leave, the price of Individual stock fell 37% from the previous day's close of $9.50 per share to $6 per share. 2
A July 25, 1996 Bloomberg News report confirmed that Amram's departure was due to the fact that Amram wanted to augment the speed and breadth of Individual's acquisitions and investments, while the majority of the Board strongly opposed such a strategy. On July 30, 1996, then-acting chairman of Individual, William A. Deveraux, also attributed Amram's departure to his frustration with the Board's position that it was inappropriate to pursue venture capital activities using Individual's funds and resources. Devereaux reiterated that the Board's plan, as described in the prospectus, was to pursue strategically moderate deals, which could easily be integrated into the Company's core business.
On August 7, 1996, Amram issued a public statement that he would resign as CEO in protest over the Board's actions during the prior two weeks. According to the complaint, those actions included his dismissal without notice after he informed other directors of his plan to establish another company, "Free Spirit Holdings," to invest in the entertainment, media and health care industries. Amram planned to contribute 100,000 shares of Individual stock to Free Spirit Holdings and wanted the Company to contribute another 100,000 shares. The Board rejected this proposal. At the end of the day, the Board announced that it had terminated the employment of Amram, although he still remained a member of the Board.
The next day, on August 8, Amram announced that he had quit his position with the Company but that he would fight to regain leadership. On August 9, Richard Vancil, Individual's vice president of marketing, explained Amram's departure: Vancil further stated that "Amram's strategy was more in line with a venture capital strategy."
In the proceedings below, plaintiffs claimed that defendants' failure to disclose the conflict between Amram and the majority of the Board at the time the IPO became effective violated sections 11 and 15 of the 1933 Act. After concluding that the complaint adequately alleged that such a conflict in fact existed at the time of the IPO, the district judge found that: (1) the alleged omission was material; and (2) although material, there was no duty to disclose.
On appeal, plaintiffs challenge the district judge's conclusion that, as a matter of law, defendants were under no duty to disclose the material fact of the Board-level dispute. Defendants challenge the district judge's threshold determination that the allegations in the complaint "barely--but sufficiently" support an inference that the Board-level conflict existed as of March 15, 1996--an essential element of plaintiffs' claim. Defendants also contest the district judge's determination of materiality, claiming that, even if the alleged conflict existed as of March 15, 1996, its omission was immaterial as a matter of law.
We review the dismissal of plaintiffs' amended consolidated complaint de novo. See Suna v. Bailey Corp., 107 F.3d 64, 68 (1st Cir.1997). We accept as true all well-pleaded allegations and give plaintiffs the benefit of all reasonable inferences. See Gross v. Summa Four, Inc., 93 F.3d 987, 991 (1st Cir.1996). Dismissal under Fed.R.Civ.P. 12(b)(6) is only appropriate if the complaint, so viewed, presents no set of facts justifying recovery. See Dartmouth Review v. Dartmouth College, 889 F.2d 13, 16 (1st Cir.1989).
Section 11 imposes liability on signers of a registration statement and on underwriters, among others, if the registration statement, at the time it became effective, "contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading." 15 U.S.C. § 77k(a). Thus, to avoid dismissal of their § 11 claim, plaintiffs must successfully allege: (1) that Individual's prospectus contained an omission; (2) that the omission was material; (3) that defendants were under a duty to disclose the omitted information; and (4) that such omitted information existed at the time the prospectus became effective. See id.
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